2nd QUARTER 2014

SA Reserve Bank warns, once again, of possible rate hike … but a recession is unlikely

The South African Reserve Bank (SARB) has warned once again that an increase in the country’s benchmark interest would be required to curb an inflation rate that’s “uncomfortably high”. Earlier this month SARB Governor Gill Marcus said raising the benchmark rate by another 25 basis points “was a possibility”. This week SA Reserve Bank Deputy Governor Daniel Mminele repeated the same warning, saying that an interest rate increase was necessary to counter rising inflation.

While the economy contracted in the three months to March, as output from the key manufacturing and mining sectors shrank, inflation accelerated to 6.6% in May which was outside the Reserve Bank’s 3%-to-6% target range. This had raised fears that the economy would be pushed into recession again. However, Marcus said that although the economy was facing “enormous headwinds”, a recession was unlikely. South Africa’s latest economic dip stemmed mostly from domestic problems, Marcus said. “While the global backdrop remains difficult as the advanced economies emerge from the very deep financial crisis of the past seven years, it is no longer the main cause of South Africa's weak domestic economic performance. The slowdown we have experienced is domestically driven, largely self-inflicted, and we cannot blame external factors alone.”